LPG market gets ready for pvt oil firms

September 1, 2016 — INDOLINK Consulting (es)

Source: Business Standard, Sept 01, 2016

Mumbai: With the central government restricting liquefied petroleum gas (LPG) subsidy to consumers earning less than Rs 10 lakh per annum, a ready-made market is now available for private oil companies. This, coupled with the lure of higher margins, is pushing them to aim for a larger pie of the cooking gas market in India.

India’s total LPG consumption rose from 18 million tonnes (mt) in 2014-2015 to 19.6 mt in 2015-2016, according to Petroleum Planning and Analysis Cell (PPAC) data. The three state-run oil marketing companies (OMCs) have 274,000 connections in the waiting list across the country, PPAC data show.

This shows that there is a huge market to tap.

Essar Oil and Reliance Industries are two private refiners vying for the LPG market in India. Mahesh Advani, head of direct sales at Essar Oil, says they have a potential market in the non-subsidised LPG customers and commercial users.The company is open to both subsidised and non-subsidised LPG distribution business in the country. Advani says a higher margin is the rationale for the company’s planned entry to this segment.

Essar Oil produces one million tonnes LPG, which it sells to OMCs. Direct selling of the product could get them higher returns. “Private players are anyway selling to the state-run companies; they can add value and make better margins,” said an analyst with a domestic brokerage firm, who did not wish to be identified. Creating the required infrastructure would, however, take time.

In the April-June 2016 quarter, Reliance Industries also tested and developed a 4-kg LPG cylinder, which it plans to launch in August 2016. An e-mail query sent to Reliance Industries remained unanswered.

Ambitions in this segment, however, might be hit because of regulations and infrastructure challenges. “These customers (those with Rs 10 lakh-plus annual income) are still with the state-run companies. They are unlikely to switch to a new company for a saving of a few rupees,” said the analyst quoted above.

Debasish Mishra, partner-consulting, Deloitte Touche Tohmatsu India LLP, however, says better services, delivery and speed of refil could help create a differentiator for private companies. They might have an upper hand in the non-subsidised market if the government allows for a tax rationalisation in sourcing LPG, he says. “There is definitely a case for tax rationalisation, where private-sector companies can be put on an equal footing to target the non-subsidised market to take advantage of efficiency and competition.”

Private companies may also be late in joining the market, as piped natural gas (PNG) is catching up in the metro cities. As on April 1, 2016, there were 3.2 million PNG connections in the country, up from 2.8 million PNG connections a year ago.

The LPG market in the metro cities might become insignificant over the next three to four years. “Besides PNG, the consumers in the Rs 10 lakh per annum income bracket are likely to be those in the metro cities,” said the brokerage analyst cited above.

In the subsidised segment, too, analysts and industry experts are not very hopeful whether private companies will be able to make a mark.

Mishra of Deloitte does not expect the government to allow entry of private companies in the subsidised segment. “The government has set itself a massive target of 75 million additional LPG connections over the next three years. Fifty million of these will be under the Ujjwala scheme, which will be predominantly in rural areas. The government may want to continue to implement this through only the OMCs and the subsidy benefit will be applicable to only their customers.”